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Steve Rattner has a provocative op-ed in the NYTimes today link here. It focuses on a drug maker, Jazz Pharmaceuticals, which has found ways to make a "nothing" enterprise into a gold mine.

The company makes an orphan drug (one defined in law as a treatment for a condition affecting fewer than 200,000 people). It gets a 50 percent research-&-development tax rate and 7 (vice 5 years for other drugs) of market monopoly after FDA approval. Jazz raised the price so that a year's treatment costs $65,000 nominally, but then subsidizes the co-payments above $35 a month (essentially a price cut for those with health insurance). In any case, the company has proved to be enormously profitable, importantly by putting its patents in a subsidiary abroad where they are taxed very little. Indeed, total profits are currently reported to be 49 percent of sales.

The question for Jazz now becomes whether competitors will be induced to compete, lowering prices, once the 7-year tax cut expires. Price competition seems unlikely, since it currently has only 10,500 customers and a competitor would have to gamble that it can take market share from Jazz.

Comments

The total profits of Jazz Pharmaceuticals for 2012 was about 30%. Jazz Pharmaceuticals then got an income tax benefit courtesy of the Irish government that bumped Jazz Pharmaceuticals total income to 49%. The 30% net profit margin is typical of many of the larger pharmaceutical companies that produce patent pharmaceuticals.

Jazz Pharmaceuticals will almost assuredly be unable to sustain the 49% margin because the income tax benefit is a temporary incentive.

Teva, which is one of the largest, if not the largest, generic manufacturer of pharmaceuticals, has a net profit margin of 10 to 15%.